Moscow needs a real strategy for Western sanctions

Russia Direct invited experts to discuss how Western financial sanctions are influencing Russia’s economy and how the Kremlin plans to respond. What’s needed, they say, is a comprehensive strategy, not a series of ad hoc responses.

A participant is reflected in a display showing business and financial information at the VTB Capital "Russia Calling!" Investment Forum in Moscow Oct. 2, 2014. Photo: Reuters

The impact of Western-led sanctions has led to the Russian government exploring new ways to protect the financial sector and broader economy against sanctions – everything from the creation of a new national payment system to the launch of new currency measures to support the ruble.

On Oct. 15, in response to these developments, Russia Direct hosted its second webinar, “Russia’s strategy against financial sanctions.” The webinar featured Dr. Oleg Buklemishev, an associate professor in the Department of Economics at Moscow State University (MGU) and a former assistant to the finance minister and to the prime minister of Russia during the 2000s, as well as Dr. Christopher Hartwell, the president of the Center for Social and Economic Research in Warsaw (CASE), and a research professor at Kozminski University who worked for the World Bank Group, the U.S. Department of the Treasury, and the Moscow School of Management – Skolkovo. In addition, Dr. Birgit Hansl, the World Bank’s lead economist for the Russian Federation, participated in the online discussion around the webinar.

The discussion centered around the effect of the Western financial sanctions on Russia’s economy and Russia’s response to those sanctions. The experts were almost unanimous in their assessments and analysis of how Western have sanctions influenced the Russian economy. The verdict was very clear – the sanctions are very negative, especially in the long run, and Russia needs structural economic reforms to overcome economic hardships.

Dr. Hartwell opened the discussion by arguing that, “The sanctions come at the worst possible time for Russia.” He continued, “Russia was already a country with an economy that was slowing down, it’s been slowing down since 2012, it was an economy already looking at recession and the sanctions have pushed it over the edge… As time is going on we see it coupled with this weak economy, which already has structural problems… [Sanctions] started to take their toll: We see it in capital flight, in price inflation, and throughout all strata of the Russian economy.”

Hartwell also stressed that if the sanctions had been imposed earlier, when the Russian economy was resilient enough and slightly more diversified, from 2000 to 2008, it would have been able to handle the economic shock of sanctions. But right now, with the budget overextended and oil prices dropping, sanctions are hitting the Russian economy. He concluded by saying that Russia, pursuing its current policy, is likely to move towards the Chinese economic model, which is more state-centric.

Dr. Buklemishev agreed that the sanctions in general brought many more problems to the Russian economy and highlighted that financial sanctions are the most dangerous. He emphasized that, “In the long-term we will suffer even more just because we are lacking investments and sanctions deprive us of the most qualitative money.”

Dr. Birgit Hansl continued the thread, confirming that “the Russia-Ukraine tensions negatively impacted already low business confidence in the economy and further depressed investor sentiment. More restricted access for Russian companies and banks to external financing is likely to have affected investment decisions, leading to a delay or a scaling back of investment programs.” She further argued that, “Consumption was most negatively impacted by the geopolitical tensions through the sharp depreciation of the ruble and related inflation pressures.”

Thus, judging by the opinions of these experts, it can be argued that the Russian economy is likely to face economic stagnation due to the lack of the investments, capital outflow and a risky political environment in the country, especially in the long-run.

Russia Direct readers who watched the webinar asked these experts about the ruble-dollar exchange rate. Prof. Buklemishev fielded that question and argued that actually it is “very difficult to say which part of the dollar exchange rate appreciation is due to financial sanctions and what is due to the free flow of the oil prices in the world markets.” However, he emphasized the fact that only after oil prices dropped in August such dramatic changes in the exchange rate started.

Discussing whether or not Russia has a strategy against financial sanctions, experts agreed that the moves taken by Kremlin are more of a tactical nature than part of a comprehensive strategy.

Dr. Hansl claimed: “The pivot to the East is not a new one, but can help – if accelerated ­– to diversify Russia’s energy exports and create new trade ties with the Asia-Pacific region.” However, she argues further that, “A return to higher [economic] growth in Russia will depend on solid private investment growth and a lift in consumer sentiment, which will require a predictable policy environment and addressing the unresolved structural reform agenda.”

Prof. Buklemishev continued, stressing the necessity of private investments and capital that mostly come from the West and are crucial for Russia’s economic growth. He argues that “currently there is now adequate replacement to Western money... no Arab sources, no Chinese sources or any other sources.”

Dr. Hartwell followed up, explaining the situation with Chinese banks offering to help Russia. As a matter of fact, Chinese banks are either state owned or very heavily politically connected to the state. That is why the Chinese money will be conditioned very differently form the Western money. It adds a lot more problems and puts Russia in China’s debt if Moscow accepts “political money” from Beijing. In that case, China gets certain leverage over Russia by introducing lending conditions on its own terms.

Since the West introduced financial sanctions against Russia, there have been talks about the possible exclusion of Russia from SWIFT (Society for Worldwide Interbank Financial Telecommunication), a move that could cut Russia off from crucial financial services. As a part of anti-sanction measures, the Russian leadership proposed to develop its own national payment system. Russia Direct’s experts, however, expressed little enthusiasm about this decision: They argued that basically there is no need to reinvent the wheel. In addition, participants were skeptical about the possible cutting off of Russia from SWIFT.

Participants concluded by agreeing that Russia needs to implement structural reforms and diversify its economy; however, that will be difficult to do in its current isolation. In conclusion, Birgit Hansl noted that, in order to maintain macroeconomic stability, policies to safeguard the Russian economy from the impact of the current geopolitical tensions would remain crucial. At the same time, “This policy effort should go hand in hand with a renewed focus on improving the economy’s microeconomic fundamentals and allowing for more efficient markets.”

You can find the full version of the webcast here. Also read our Brief “Moscow’s Strategy Against Financial Sanctions”which outlines the Kremlin’s response to sanctions and presents a set of recommendations for how to deal with increasing economic pressures.

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Alexey Khlebnikov is the Senior Editor at Russia Direct. He is also an experienced international relations researcher with a focus on the Middle East and Russian foreign policy. Alexey graduated with both a BA and MA in International Relations from Lobachevsky State University of Nizhni Novgorod and holds a Master’s degree in Public Policy from the Hubert H. Humphrey School of Public Affairs at the University of Minnesota. Alexey has been published on international relations topics in academic journals and media sources in both Russia and Israel.